Dividend need to put State corporations under pressure

State companies will have to pay dividends, as part of an effort to boost budget revenues initiated by First Deputy Prime Minister Igor Shuvalov, after having been exempted during the financial crisis.

The cost of battling the crisis has hit Russia's budget – the government gave up almost $700 million of income last year through the suspension of dividends.

Now that's come to an end. State owned companies must pay one quarter of their net profit to in dividends. But the move could leave those companies short of cash to finance investment projects – especially those that struggle to borrow from banks – according to Mikhail Zak, Research Director at Veles Capital.

“I think in case the state binds Gazprom to pay 25% in dividends the company will find a way to replace the funds, as many investors are ready to give money to this first-rate borrower at reasonable interest rates. But there are companies like Russian Railways that are highly geared and for whom it would be very hard to substitute this 25% of net profit.”

It's not a new problem. Before the crisis only Aeroflot managed to meet the state's recommendation of a 25% dividend. Gazprom paid 17.5%, Rosneft 10.5%, while Russian Railways paid only 0.6% of its net profit. Aleksandr Shokin, Head of the Union of Industrialists and Entrepreneurs says complying with the new directive will cause some to seek offsets.

“But we are also aware that for some state companies that would mean increasing their tariffs to sustain their investment programmes or ask for compensation in the budget.”

The ability to pay a dividend varies with sector. The most generous companies are in the lucrative oil, gas and metals sectors, while the most hard pressed companies are in the power sector.

To compensate shareholders or to invest in the business – David Yabobashvili, Chairman of Wimm-Bill-Dann says it's a familiar dilemma for companies in the private sector.

“Our shareholders should benefit profit of the company and see the future of the company and in such a crisis period the payment of dividends will be the healthy step for the company itself, for the political situation of the company and importance of shares on the market.”

To pay, or not to pay, is a question not just of recovery. Young, fast-growing companies often reinvest all their earnings, while larger corporations pride themselves on steady dividend growth. In Russia this year, most private companies say they do plan a dividend payout.